Question

Penn Company uses a predetermined overhead rate based on direct labor hours to apply manufacturing overhead to jobs. At the beginning of the year, the company estimated manufacturing overhead would be $100,000 and direct labor hours would be 10,000. The actual figures for the year were $110,000 for manufacturing overhead and 10,500 direct labor hours. The cost records for the year will show: * 1 point C) underapplied overhead of $5,000. D) overapplied overhead of $5,000. B) underapplied overhead of $10,000. A) overapplied overhead of $10,000.

Answer 1

Answer:

C) underapplied overhead of $5,000

Explanation:

If the Actual Overheads > Applied Overheads, we say overheads are under-applied.

and

If the Applied Overheads < Actual Overheads, we say overheads are over-applied.

where,

Applied Manufacturing Overheads = Predetermined Overhead Rate × Actual Hour

and

Predetermined Overhead Rate = Estimated Overhead ÷ Estimated Total Hours

                                                    = $100,000 ÷ 10,000

                                                    = $10.00 per direct labor hour

Thus,

Applied Manufacturing Overheads = $10.00 x 10,500 direct labor hours

                                                          = $105,000

therefore,

Actual Manufacturing Overheads = $110,000

Applied Manufacturing Overheads = $105,000

Overheads under-applied = $5,000 ( $110,000 - $105,000)